It’s never popular to buy stocks that have been out of favour for a long time. Investors like it when stocks have been going up for some time before they buy them. For that reason, they usually prefer to pay steep prices for stocks that may or may not be good but definitely could have been bought more cheaply.
In this article, I will explore one beaten-down TSX stock whose name has been so tarnished it might sound ridiculous to even mention it, but it does have some things going for it under the hood.
Air Canada
Air Canada (TSX:AC) is one of the worst-performing TSX stocks over the last five years. It peaked at $52 in February of 2020, fell 70% in the early months of the COVID pandemic, eventually rose to $20 when the vaccine was announced, and then fell as low as $15 afterward for reasons that weren’t entirely clear. Today, it trades at 3.7 times earnings, making it one of the cheapest major Canadian companies.
Now, when I say AC was beaten down for reasons that aren’t entirely clear, I don’t mean that it was beaten down for no reason at all. Air Canada’s post-COVID recovery was rocky at times; for example, it took huge jet fuel costs on the chin in 2022. However, today at $16.40, the stock is closer to its COVID low — set when it was deeply unprofitable –than its post-vaccine announcement high of $27. It seems strange for AC stock to now be relatively close to its levels in the midst of the COVID-19 pandemic when there were serious questions about whether the company would even survive.
Three things are clear today:
- AC stock is very cheap going by trailing multiples (3.7 times earnings, 0.3 times sales, 1.5 times cash flow, etc).
- Oil prices are trending downward.
- The potential strike–the most recent scare that got people selling AC–was averted.
It would seem like Air Canada should be profitable and capable of at least maintaining its earnings level going forward. If I’m right about this, then the stock is cheap and should rise in the future.
Steady recovery
Air Canada has been recovering admirably since the COVID-19 pandemic called its profitability into question. The company’s most recent earnings release did show a minor setback on the profitability front — net income declined 50% to $410 million, or $1.04 per share. The markets took that badly, but if earnings are maintained at $1.04, then the price-to-earnings ratio rises to all of 3.94 — that’s still much cheaper than average. It implies that AC has considerable ability to return wealth to shareholders relative to the amounts shareholders are paying now.
Foolish takeaway
Buying a stock like Air Canada right now won’t win you a lot of friends. It’s been down for a long time. However, history shows that stocks that get beaten down beyond all reason are often good buys. For this reason, I would be comfortable holding AC stock today.
